What are the three levels of the fair value hierarchy used by Monicals Pizza, and how are they prioritized?
Monicals_Pizza Franchise · 2025 FDDAnswer from 2025 FDD Document
The Company follows current guidance related to fair value measurements, which, among other things, requires enhanced disclosures about assets and liabilities carried at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company is able to classify fair value balances based on the observability of those inputs. The guidance establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy are as follows:
- Level 1 Inputs Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.
- Level 2 Inputs Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
- Level 3 Inputs Unobservable inputs for the asset or liability.
Source: Item 23 — RECEIPTS (FDD pages 46–257)
What This Means (2025 FDD)
According to Monicals Pizza's 2025 Franchise Disclosure Document, the company adheres to current guidelines for fair value measurements, which mandate detailed disclosures regarding assets and liabilities recorded at fair value. Fair value is defined as the price that would be received when selling an asset or transferring a liability in a standard transaction between market participants at the time of measurement. The company uses market data and assumptions that market participants would consider when pricing the asset or liability, including risks associated with the inputs used in the valuation technique. These inputs can be easily observable, corroborated by the market, or generally unobservable. Monicals Pizza classifies fair value balances based on the observability of these inputs.
The document establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities, which is classified as Level 1 measurement. Conversely, it assigns the lowest priority to unobservable inputs, known as Level 3 measurement. This means that Monicals Pizza prioritizes readily available market data over subjective estimations when determining fair value.
The three levels of the fair value hierarchy are defined as follows:
- Level 1: Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.
- Level 2: Inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
- Level 3: Inputs are unobservable inputs for the asset or liability. This means Level 1 is the highest priority and Level 3 is the lowest priority.